Credit Cards

Go ahead and take a deep breath...I am not going to tell you that you cannot have a credit card.  I myself own two, and the benefits and ease of using them is quite nice.  But I will say in the same breath that the ease of using them is also dangerous.  And quite dangerous, at that.

I receive at least two credit card offers each week, and with such persistence, it is hard to avoid opening them up.  And I am absolutely amazed at the cleverness and ingenuity behind the offers.  I often tell my family that credit card companies hire the smartest people in the world.  They are very creative in their methods for getting more of your money.  And they do just that...they reap billions of dollars each year.  And frankly, they keep other companies in business, including debt consolidation companies.  So with such grave dangers, why are credit cards so enticing?

First, let’s look at how credit cards work.  There are literally hundreds of cards to choose from, but they each operate in the same manner.  They give you (the buyer) the opportunity to purchase items on credit (without the use of money), hence the name “credit cards.”

So I am able to purchase something with my credit card, even though I may not have money to buy it.  I see something I want for $100.00, and rather than pay cash, I whip out the card, and the item is mine.  It’s as simple as that.  Sort of.

You see, now I have a $100.00 bill on my credit card.  And what I do with that can have good...or absolutely devastating...consequences.  Let’s say that I only buy that one item this month (credit cards use monthly billing periods).  So I receive a statement in the mail that says I owe the credit card company $100.00 (the credit card company essentially paid off the retailer so now I owe the credit card company the money).

But like I said, credit card companies are smart.  Very smart.  So when I open up the bill, I am pleased to discover that the minimum payment is only $20.00!!!  I have a $100.00 bill, but they only ask me to pay $20.00.  What a nice company!

And so begins the doom of literally millions of Americans.  By not paying off the bill in its entirety, the other $80.00 goes into a process of having interest added to it.  High interest.  Most credit card companies will charge anywhere between 12% and 30%.  And that adds up quickly.

How quickly?

 
Let’s say you only make that one purchase of $100.00, and you only pay the $20.00 minimum payment.  Let’s assume a card with 18% interest.  It will take you 5.24 months to pay off just that $100.00 payment.  And you will have spent $4.73 in interest (4.74%).  Ok, ok, outside of it taking nearly a half a year to pay off those sneakers, that doesn’t sound too bad, really.

So what’s the problem?  The problems are several.  The number one problem is that most people do not have the discipline to only make one $100.00 purchase in a month.  They buy, buy, buy...with their credit card.  The problem is that most people have credit card bills of more than $100.00.  The problem is that the situation gets a whole lot more ugly when we actually take a “real” credit card statement, one that readers like you may have.

So let’s just bump that $100.00 up to $1000.00.  And let’s continue with our minimum payment of $20.00.  At the same 18% interest, it would now take 7.76 years to pay off our bill.  Seven years!!!  And this assumes that we don’t charge anything else to our credit card, which for most people, is highly unlikely.  And not only will it take over seven years to pay off the card, but the buyer will have spent $862.22 in interest charges.  Effectively, that is an 86% interest rate.

Would you pay $1862.22 for something worth $1000.00?  That is exactly what is happening every day around the country.  Because people do not understand how money works, they swipe their cards and keep racking up the bills.  And the credit card companies literally own these people for years and years and years.  Check out the below scenarios.  We will assume an 18% interest rate and we’ll even bump the minimum payment up to $50.00/month (the last two figures require monthly payments of $61.00 and $76.00 respectively to at least cover the interest-only charges).

Credit Card Balance               Years to Pay-Off        Interest Paid

$1000                                      2 years                         $197.81

$2000                                      5.13 years                    $1077.15
$3000                                      12.89 years                  $4732.71
$4000                                      23.01 years                  $12842.62
$5000                                      24.24 years                  $17106.54

Remember, this assumes no late fees or future charges made to the credit card.  The above situations simply represent what you would have to pay if you cut up your credit card and threw it away, making no further purchases with it.  Notice just how long it takes to pay off something when making the minimum payments.  And also notice just how much you pay for the item when it is all complete.  That $5000 furniture set doesn’t sound so appealing with a $17,000 price tag on it, now does it?

This is how credit cards work.

But this is just the beginning.  Remember how I said that credit card companies are smart?  Let me give you just a sample of what tricks and tactics they employ, all based from credit card offers I have received in the mail.  These are real methods that they use.  They are sneaky, but they snag customers every day.

Offer #1

$100 Free Gift Card!

I received numerous offers from the same company to open up an account with them.  And if I did, I would receive $100 for free.  The offer was legit, and it’s a strategic way to entice people to sign up.  By the way, have you ever seen a poor person offering people $100 for free?  Or have you yourself just walked around offering $100 to anyone just for the sake of doing so?  Of course not.  Let this be a lesson to you that these credit card companies will make back that $100 easily.  Very easily.  With the above scenarios, just take someone that makes a minimum payment on a $3000 balance.  The credit card company ends up receiving over $4700 on a $3000 balance, for a profit of $1700.  That is 17 free gift cards that they can now mail out just based upon one person’s credit card bill!  A 1700% return is not a bad investment.

So think twice before signing up for free money.  Do you really need another credit card?  Or a credit card in the first place?  Maybe the better question to ask is:  Would you have signed up for one if they didn’t mail you something?  Do you really need it?

Offer #2

Free Checks to Pay Off Other Bills!

A couple of years ago, I started noticing checks coming with my credit card bills.  They were genuine checks, much like the ones I use from my checkbook.  And with them came a letter that said that these checks can be used for ANYTHING!  A new motorcycle, a new pair of shoes, another cell phone, the electric bill...whatever I wanted to use them for!  I mean, how sweet would it be to walk into a store, and pay for something using a check that someone else gave to me?!  It’s hard to beat!

Until the next credit card bill comes along.  All the credit card company is doing is putting a plastic credit card into paper form.  So let’s say you use one of those checks and make a $2000.00 purchase.  Essentially, all you have done is make a $2000.00 credit card swipe.  The credit card companies just needed a different way to get you to charge something.  And my guess is that it worked.  And worked well.  I never used to get these checks, but ever since they started a couple of years ago, I keep on receiving them in the mail.  And as we all know, a company will not continue to market something that doesn’t work.  I keep getting these blank checks in the mail because people keep using these blank checks.

My advice?  NEVER use these checks.  If you are wanting to charge something to your credit card, then charge it to your credit card.  These checks only spell trouble.

 
Offer #3

Balance Transfers

As I love to say, “Learn one thing, and do something with it.”  I want you to read, re-read, and then re-read this section.  This is one of the most dangerous pitfalls in all of credit card mistakes.  Taking “advantage” of a balance transfer offer can literally spell financial ruin for you.  And yet it’s often so hard to see.

 
So I open up my mail.  Another credit card offer.  And this time, I have one that offers balance transfers (I think virtually every credit card has now moved to balance transfers because it is such a lucrative business).  A balance transfer is just that...the credit card company is allowing me to transfer my balances from other places to my credit card.  For example, if I owe $6,000 on my car, I can ask the credit card company to do a balance transfer.  The credit card company [gladly] pays off the bank and then accepts the $6,000 balance.  I now owe the credit card company rather than my personal bank.
 
And how do you get someone to open up a present?  Wrap it up in shiny paper!  Put horns and bells and whistles on it!  Make it look great!  So they do just that.  Here is a common offer...
 
0% on Balance Transfers for 12 Months OR 0% Balance Transfers Until 12/31/07 (or some date 10-18 months from now)

What a sweet deal!  I am currently paying 6% interest on my car at my bank, and here they are offering me 0% interest!  Why not switch, right?!  That’s exactly what they want you to think.  And they are successful!  So many people do the balance transfers.

 
So let’s just play this situation out.  On January 1, 2007, I do a balance transfer of $6,000.00.  I continue my monthly payments just as I had at my bank, and I knock that balance down to $5,000.00 in one year ($83.33 each month).  Now January 1, 2008, rolls around.  And overnight, that 0% interest changes to 18%.  And I continue making my monthly car payments.  It will now take me 12.89 years to pay off that $5,000 of my car, and I will have spent $7,889.34 in interest.

And here I thought I was saving money by transferring my balance.

But it gets worse.  In EVERY balance transfer offer you receive in the mail or online, you will notice a very small sentence.  But sometimes the smallest sentences carry the biggest weight.  “Pearl Harbor Bombed.”  “I love you.”  “Your mom died.”  “Will you marry me?”  “Child Missing.”  And then this one... “Payments will be applied to higher APR balances first.”

Um, ok, whatever.  And you keep reading.  0% interest for 12 months!  Sweet!  I can switch over my car, my truck, my motorcycle, my boat...

“Payments will be applied to higher APR balances first.”

What does that mean?  I mean it sounds good!  I want to knock down balances with higher interest rates first, right?!  And then tackle the lower ones?  Maybe.  But in this case, probably not.

The above statement  means exactly what it says, though frustratingly, credit card companies don’t really openly disclose the details of the concept.  They leave it up to the people to find out.  And most simply don’t.  So here is what it means...

Let’s say I do that $6000 balance transfer.  And let’s say that I use this credit card to make only minor purchases...say a meal or two a month.  So I only put $25.00 extra on the card.  Nothing bad at all.  The end of the month comes around, and I make my car payment of $83.33 ($1000 a year) that I used to pay to the bank.  But here is the problem.  As that small sentence states, the payment will be applied to higher APR balances first.  Since my $6000.00 has a 0% APR and my other credit card purchases have an 18% APR, my payments go towards my monthly purchases first.  So $25.00 gets taken away from the $83.33, and only $58.33 is actually applied towards my balance transfer.  My credit card expenses are paid off for that month, but less was applied to my balance that I transferred.

Just how big of a deal is that?  Frankly, you don’t want to know.  I now only pay $58.33 per month on my $6000 balance transfer, leaving me with a balance of $5300.04 after the full 12 months (versus $5000.00).  With constant monthly purchases of only $25.00, I would have to have a minimum credit card payment of $80.00 towards my car at that time just to cover interest (so I would now have to pay $105.00 each month to keep the pace from before [$80.00 required payment + $25.00 monthly expenses]), and it would take me over 28 years to pay off my car.  Not to mention I would have spent $21,976.51 in interest charges.

And here I thought I was saving money.

Balance transfers often spell financial ruin for you, but spell riches for the credit card companies.  Unless you can pay off your transfers in less than one year (and even then, I am very hesitant in ever encouraging the use of this offer), DO NOT even think about a balance transfer.  You will bury yourself in a hole that will take years to get out.

Offer #4

Here is a check for $15.95!  Cash it!  It’s free money!

I would constantly receive checks in the mail from my credit card company.  And the amounts often varied....$13.95....$15.95...$14.95...$20.00.  And it was a legitimate check!  All I had to do was sign the back and take it to the bank!  And I would get my money!

And I would also get a subscription.  Because if you read the fine print (Remember:  If it’s fine, it’s not fine!), you will see that cashing this check automatically enrolls me in a program with a monthly subscription fee.  The words are always there, but people seldom take the time to read them.  And I must admit that I was always enticed to cash the check, then cancel my enrollment.  But it was always too much headache, and if I ever forgot to cancel, I would have ended up losing money.  And I would very much hate to do that!

These are the most common offers that I am familiar with.  I am sure there are countless other offers out there, and I am sure they all seek to put more money in the pockets of the credit card companies.  Like I say, these guys are good!  They are very smart.

So why do I have a credit card?  Because for every 10 people who are terrible with money, there is an occasional money-savvy person.  And I use the credit cards to my benefit.

I applied for a credit card with 5% cashback at gas stations, grocery stores, pharmacies, and restaurants.  And I had a truck (I was always buying gas), and I ate out frequently.  Every few months, I was being sent checks for amounts of $50.00-$70.00.  It was rather nice.

But let me tell you something.  I NEVER miss a payment on my credit card.  There is absolutely no reason for me to not pay off my credit card each month.  I simply refuse to miss a payment.  (I did miss a payment one time.  I actually made the payment, but I was late, and I was charged a late fee.  To this day, I still even hate the thought of that!).  Paying off your credit card bill monthly takes discipline, and it also takes knowing how much you spent that month.

 
If you have ever opened up a credit bill only to say, “Wow...that can’t be right,” then I do not support you in your credit card habits!  You should know exactly how much your bill is going to be each month.

To be fair, I have had months with the “Wow!” statement.  But sure enough, as I make my way back through the list of items, I am reminded of restaurants eaten at, gas stations visited, or online purchases made.  The statements don’t lie.  And I have kicked myself for not knowing how much my statement was going to be.  If you are as eager to find out how much you owe as you are about the score of last night’s game of your favorite baseball team, then you have some work to do.  Don’t be surprised when you look at your statement.  Know the amount even before it comes.

Credit cards are like fire.  They can be used for good, but they require constant supervision, maintenance, and control.  And if they ever get out of hand, it may be impossible for you to get them back under control.  (Go ahead and ask me about the wildfire in Portugal!).  Just remember:  with fire, you can always get burned.

Learn one thing, and do something with it.

How Interest Works

I once heard someone say, “Ask a question, and be a fool for five minutes. Don’t ask, and be a fool forever.” That principal works so well in money. The fact of the matter is someone can tell me all of the details about a Roth IRA...and yet know nothing about how interest works. Or someone could be on top of all of their credit card transactions...and yet know nothing about buying and owning a house. I’ve noticed that oftentimes, if someone would just know basic principles of money, they would be so much better off in our world!

So it is with that that I have made this website. I want you to understand how money works...even down to the most basic of principles. If you don’t understand how interest works, that is fine! But do something about it. That is the entire purpose of this specific article...let’s now turn our interest towards interest!

Picture a cute kid sister going into a store with her older brother. The sister sees a pack of bubble gum that she really wants. But she is young, and she has no job. And she has already spent her monthly allowance from her parents! So she asks her older brother for $1.00. Being a kind older brother (hardly!), he says that she can have one dollar only if she pays him back with interest. He is charging his kid sister for borrowing some money! Talk about a future banker!

Well, he decides to charger her a common rate of 8%. The sister agrees. She takes her brother’s $1.00 and buys her bubble gum. A couple weeks pass by, and the brother has still received no money. So he approaches his sister and finds out that she just received her $5.00 allowance from Mom and Dad. Big brother comes in, requests his money, and she hands him $1.00. “Nope, nope, nope,” he says. And he reaches down and grabs his eight cents earned from interest. The sister is a bit confused, as she doesn’t even remember what she spent the dollar on. How many times has that happened to someone?! I can remember numerous times of opening up a credit card statement and wondering why the bill is so high! And in this case, the sister no longer has any tangible record of her spent dollar bill. The bubble gum is long gone (a couple weeks ago!), and she owes her brother for something she doesn’t even have any longer.

This story is an easy way to see how interest works. You essentially pay someone for using their money. In this case, the kid sister is paying her brother eight cents for using his dollar bill. Rather than paying for a car or stereo or pack of bubble gum with money, you are actually paying someone for money! That is the principal behind interest. Every day, people pay banks to buy their money. That is interest in a nutshell.

The difference is that it’s not bubble gum that we are buying. And it’s not our brother we are borrowing from. In most cases, the items we purchase are larger and more expensive (clothes, cell phones, cars, motorcycles, electronics, Big Macs, and on and on and on!). And we are usually borrowing from credit card companies or banks.

So “it’s only seven cents,” right? That seven cents on one dollar is the same as $7,000 on $100,000 (7% of $1.00 is $0.07 just as 7% of $100,000 is $7,000.00). But you may argue that you would never charge a $100,000 bill to your credit card. Of course not! You would simply do it another way...as in signing up for a 30-year mortgage on a house with a 7% APR [be sure to see my page entitled “What a House Really Costs You” before making any purchase or to see what it happening after your purchase...you need to see this!]. And I won’t go into the details here, but notice that I said 7% APR...or Annual Percentage Rate. If you bought a house for $100,000, you would certainly NOT only pay $7,000 in interest. In simple terms, you would pay $7,000 in interest in that first year of your mortgage. But check out the above article for the details.

Back to our story about interest...the kid sister actually had to “buy money” from her older brother. She had to pay $1.07 for $1.00. Well, that’s not fair, right?! That depends upon how you look at it. The kid sister had two options: borrow money from her brother and purchase the bubble gum, or not borrow and walk home with no bubble gum. So she could have either not paid for the money and left with nothing or paid for the money and left with what she wanted. She chose to pay for the money.

Now this is a personal matter, and you can read how I feel about it in the article “To Debt or Not to Debt,” but I am not going to tell you what to do. I am not going to tell you that you cannot purchase bubble gum. I am not going to tell you that you cannot purchase a new cell phone. Those decisions are up to you. But I will tell you this: If you purchase a cell phone or a house or a car on credit (with interest), and when I ask you how much you are going to pay for it in the end after all your payments, and you cannot tell me, then hear me on this: I will NEVER support you for your purchase.

Too many times, I see people buying items with their credit cards, or taking advantage of “special offers” (no interest, no money down, no payments for one year!), but they have no idea what they are doing. If I were to ask them how much they paid for that bubble gum, they would tell me $1.00. And that is the wrong answer!!! They would need to tell me $1.07 before their answer would be correct (and before I would be happy). They actually had to pay $1.07 for $1.00 worth of bubble gum.

Interest is simple and quite easy to understand once you know what you are dealing with. Of course,
there are often more details to put into the equation such as APR, different interest rates, compound
interest, revolving interest, interest-free loans (for a time), etc. But as long as you understand even the basics of how interest works, you will be better-equipped in ALL of your purchases.

I used the illustration with bubble gum, but let me put a more realistic scenario here to show the reality of what interest will cost someone...

Let’s say you buy a car for $10,000. You do not have $10,000 in your pocket or in your checking account, so you take out a loan on the car. You get a decent rate of 6% APR over 5 years. After the first year, you will have paid your bank $480 just to use their money. That’s $40/month that is essentially “worthless” to you. It is going straight the big brother (or the bank here). The second year? $360. The third year? $240. The fourth year? $120. And the fifth year? Zero.

So after five years, that $10,000 ended up costing you $12,000. That’s how interest works. You paid the bank $2,000 for the $10,000 they gave to you. You bought their money. That’s free money to the bank, and they love you for it.

As I always tell people, you will see businesses, restaurants, and retail stores go out of business. But when is the last time you saw a bank shut down? And I have always noticed that banks are almost always built out of fine brick and have beautiful landscaping.

Why? Because they can afford to do so.

Why? Because of you and me!

So, as I always say, “Learn one thing, and do something with it.” I want you to figure out how much
interest you pay each month on something. Whether that be your car, your house, your clothes, your cell phone, whatever.

And I want you to find out the exact month that you will pay that off. If I were to ever ask you, when is your house paid off? I want the exact month, year, and how much it will cost you in the end. If I were to ever ask you, when is your car paid off? I want the exact month, year, and how much it will cost you in the end.

Learn one thing, and do something

The "Best" Deals

(first written August 2007)

The best advice I could ever give you about your purchases is this:  “The deal of a lifetime comes once every seven days.”   I want you to think long and hard about that statement.  I first heard it from a real estate agent when I was looking to buy a house.  His wisdom has stuck with me.

I bought my first motorcycle for $300.00.  Sure, it smoked a little bit, but it cruised down the highway at 65 mph with no problems.  This was actually my only mode of transportation at the time, and I used it to go everywhere!  I had found the best bike.

Well, that was until a year later when I found another motorcycle for $525.00.  It was quite a bit newer, about twice the size, and it ran like a champ.  I rode this one until I found another motorcycle...good price, only a few years old...

The story goes on and on.  When I was searching for a truck to buy, my dad would repeatedly say to me, “There are always trucks for sale.”  It’s a good point.  And it would be a fine point to remember anytime you or I go to a store.  There are always cell phones, couches, rugs, flowers, plasma TV’s, candy bars, and MP3 players for sale.

They will be for sale when we are at the store, and they will also be for sale when we leave the store and go home.  They will be for sale when we want to make an impulse buy, and that same item will be for sale when we fight the urge, go home, see if we can actually afford it, and think it over for a day or two.

But the companies know that we have people that like to buy things.  And they know just how the human mind operates.  At least in America, people want bigger, faster, newer, or customized.  So companies spend millions of dollars each year on advertisements with slogans like... “new and improved,” “4GB instead of 2GB,” “increased legroom,” “more horsepower,” “advanced formula,” “choose your own color,” and on and on.  Go ahead, next time you go to the store or look at Sunday’s advertisements, check out just how many companies use terms like that.  They are only trying to create a sense of disappointment in you.

If you have a 2GB MP3 player (which is not even full of songs yet, but that is besides the point), and a 4GB MP3 player comes out, the companies try to get you to think that your “old” (maybe a few months) MP3 player is out-of-date.  They do it everyday with everything from laundry detergent to automobiles.  It is far easier to create a sense of disappointment than to create a new sense of longing.  As long as they can create a sense of disappointment, though, the “want” will always follow.

I challenge you to ask yourself why you are shopping for a new couch, a new car, a new pair of jeans, a new cell phone.  It may very well be that you “need” (I use this term very loosely) these items, but if you are shopping for a cell phone with one already in your purse, just do me a favor and ask yourself why.  Or if you find yourself in the furniture store calling your husband who is at home on your couch, just do me a favor and ask yourself why.

The problems of impulse-buying are too deep for one article, and what I really want to address is the strategic but very dangerous tactics that companies use to get you to buy their products.  I hope to give you the knowledge to prevent yourself from getting caught in what thousands of Americans fall prey to every day.  Companies know that they have to be smart in order to get you to buy their products, and so they create clever systems that I will discuss below.  PLEASE read through each of these systems in detail.  They are not difficult to understand, but they are very easy to accept.  But when you see what is actually happening (they often don’t proudly disclose these details...they are always what you find in small-print at the bottom of the page or at the bottom of the commercial or what you hear the speed-talker say at the end of a radio advertisement), you will be better-equipped to take advantage or not take advantage of the offers.  And in most cases listed below, it is best to not take advantage of these offers.

See if you recognize any of these...

LOW MONTHLY PAYMENTS

This is without a doubt the best offer used by companies.  And if you get nothing else out of this article, then please just remember this:  Whenever you see the term “low monthly payments,” put up your guard and be VERY careful.  This should raise yellow flags for you.  Why is this a problem?  I mean, after all, don’t I want to have low monthly payments?!

Maybe.  But most likely not.  Depending upon the offer, low monthly payments simply means that you pay more in the long run.  It’s a simple fact...if you pay less, then your loan is longer.  If you make payments of $5 on a $100 loan, it will take you 20 payment terms to pay off that loan.  If you make $10 payments, your loan time will be cut in half with only 10 payment terms.  If you make $50 payments, you will be done in two payment terms.  This is a no-brainer.

So I absolutely love to go car-shopping with my dad.  It seriously rivals any sporting event.  The excitement, the intensity, and the humor is more than enjoyable.  I guess you can say that my dad “knows” the system.  So here’s the scenario that is as predictable as the morning sunrise.  I have seen it numerous times in one single day, and I have seen it repeated over the course of years...

My dad figures out what he can afford for a car.  He takes that figure with him.  Let’s say $20,000.  That is the top price he can pay for a car.  He has punched the numbers at home, and he can’t go over that.  So he heads to a dealership.  He tells the person that he wants a car for $20,000, and we often are shown cars for $24,000-$25,000.  Of course, we are often not told that at the time.  Sometimes they have the price in the window, other times not.  When the price is there, my dad will look at the guy funny, try to figure out why he doesn’t understand English, and then adamantly tell him that he wants a car within the $20,000 price range.

“Well, how much can you afford?  What are your monthly payments on your car now?”

(Did your yellow flag meter go up?!)

And my dad responds, “Sir, I have already figured out what I can afford.  I told you I need a car for $20,000 or less.”

“Well, what monthly payments are you looking for?”

(Your flags should be flapping in the wind now!)

And so he continues his sales tactic.  He has been taught, trained, and become rather successful at selling monthly payments (even moreso than cars).  He could be selling a house for all he cares.  All he needs to do is sell the low monthly payment to the customer, and he has a buyer.

Unless you are my dad.

Let me show you what is actually happening “behind the scenes.”  The car salesman is trying to sell the low monthly payment, because that is how people are taught to think.  Our society has trained us to get by with payments.  As long as we can pay the bills this month, then we are secure.  And so every year, millions of people live month-to-month, paying off whatever monthly payments they have (house, car, boat, motorcycle, etc.).  And yet they know not what they are doing.

So let’s say my dad has a monthly car payment of $350.00.  Let’s say he owns a 2004 car that he bought brand new for $15,000 with a four-year loan.  He shops for a car in 2007, so he is three years into his loan, still owing $4000.00 on the car.

He then goes to the dealer, and he says he wants to buy a car.  The salesman only wants to know what you can afford each month, and he will tailor a loan to fit your monthly payment.  How does this work?

Well, let’s say that my dad goes to the dealer and actually answers the salesman’s question.  “What are your current monthly payments?”

“I am paying $350.00 a month.”

“Ok, great, we can get you into a very nice car for $350.00 a month...”  And the salesman shows my dad a whole section of brand new cars, all with prices of $25,000.  How is this possible to have a $10,000 difference between my dad’s 2004 car and a new car yet still have the same payment?!  Simple.  Change the length of the loan, but keep the same “low” monthly payment.

Let’s watch what happens.  Let’s say my dad finds a $25,000 car he really likes.  Ok, let’s make a deal, the salesman says.  And they go inside and he shows my dad that his monthly payment will be $350.00.  He simply does this by adding more payment terms to the loan.  In this situation, the $25,000 loan would be a 7-year loan at a 5% interest rate.  This would give a monthly payment of $353.35.  My dad’s previous loan was at the same interest rate of 5%, but it was only for four years.  His monthly payment was $345.44.

And so every day, car salesman sell “low monthly payments.”  Yet what are they really doing?  Or better yet, what is the customer actually doing?  The customer is still paying for that car.  Just because you have low monthly payments does not mean that you pay less.  It’s actually the opposite, but often consumers simply do not understand.

If you have low monthly payments on a $25,000 car, you will still pay for the entire amount of that car (plus interest).  Over the seven-year loan, your final payment will be $29,681.22.  And that is with your low monthly payments!!!

This same tactic is used for nearly all large items that businesses sell (be sure to see the article on “Buying a House” for the same story but with larger numbers and bigger consequences).  Motorcycles are advertised for $79/month.  Televisions are advertised for $50/month.

The best thing you can do when you are offered a low monthly payment is to respond:  “How much will I pay in the end for this item?”  Not only will that show the salesman that you know what you are talking about, but it will also give you the most important answer that you need!  And when you hear that you actually pay $2000 for the $1000 computer, you simply refuse the special offer and turn around and walk away.  It’s that simple.

NO MONEY DOWN, NO PAYMENTS, NO INTEREST FOR 12 MONTHS!

Too good to be true?  Perhaps.  Well, the fact is that this statement is very true.  This is often used with companies that sell furniture or electronics.  They paint this slogan in bright neon letters on their storefront windows, and it’s hard to drive by without stopping.  I mean, who wouldn’t want to buy a new kitchen table and chairs and pay nothing for them, right?!

And thousands of people do just that.  They buy a beautiful new living room on January 1, 2007, and they invite guests over to watch football on their new micro-suede furniture.  And they smile the whole time because they still haven’t paid a penny for the items!

Then January 1, 2008, comes around, and they start making their payments.  Except they realize one thing that they must have overlooked one year ago.  Not only are they responsible for their monthly payments in 2008, but they are actually responsible for their payments in 2007, as well!

How does that work?  Well, if you read the fine print (let it be known that anytime there is fine print, there is a catch.  This is almost a 100% accurate statement.  So just remember this handy little slogan... “If it’s fine, it’s not fine.”  In other words, if there is fine print, there is a dangerous catch wrapped up in pretty little wrapping paper.  Buyer beware.), you’ll find out that this is how this particular system works.  Here is an example from an ad taken from *************

************

Now, please understand that I am saying the following words cautiously.  I will rarely use a blanket statement for everyone when dealing with money issues, as every situation is different.  And the following advice is meant for money-saavy people, for people who have had years of experience of handling money well.  If this does not apply to you, then the risk far outweighs the reward.  I do not recommend what I suggest.  First get a handle on your finances, then start taking advantage of offers like this.

Here is how this offer can be advantageous.  As I mentioned earlier, the fact of the matter is that this offer really does require no down payment, no interest, and no payments for a full year!  But a smart purchaser can actually make payments during this first year and acquire items that they may have not been able to otherwise.

Let’s say Jim and Diane want to buy some new furniture soon.  Their reclining sofa finally gave out after 10 years.  But after all of their expenses, they only have $50.00 left over each month for such a purchase.  They found a sofa that they love, but it costs $500.00, much more than they have available.  They have two options here:  they can put away that $50.00 each month and wait 10 months until they have the $500.00, or they can go ahead and buy the sofa now (with the above offer included) and being making payments the first month (though it is not required).

And voila!  They have a new sofa, and after 10 months, it is completely paid off with absolutely no interest charges!  They even had two months to spare.

This is a beneficial way to purchase some items (do you really need them?!), but let me say that it can be dangerous, too.  Let’s say that an unexpected expense came up in month 5.  The transmission went out in the car, the refrigerator stopped working, or a relative died far away and plane tickets had to be purchased.  Anything can happen, and if the couple doesn’t have substantial money set aside for emergencies (transmissions alone cost over $1000), then their plan to buy the sofa could backfire.  They would need to tap into that $50.00 each month to cover the emergency expense, and this would force them to enter into the monthly payments with interest that come 12 months after purchase.  Only having a “two-month” buffer time can be risky.  If the sofa cost $300.00, they situation could be better.  If it cost $600.00 (all 12 months of $50.00 payments would be required), that is quite a gamble.

So this offer can be advantageous to saavy money users, but it still has its risks.